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The Value of Medical Spending

It's no secret that medical costs have skyrocketed over the past few decades. Annual medical spending per person has gone from about $700 in 1960 to more than $6,000 today—and that's adjusted for inflation. In any public discussion about whether such spending increases are excessive, it's important to understand the true relationship between medical spending and life expectancy. A new study of medical spending between 1960 and 2000 has found that increased spending does have clear health benefits.

Dr.
David M. Cutler, an economist at Harvard, and his colleagues set
out to examine how medical spending has translated into gains in
survival. With funding from NIH's National Institute on Aging (NIA)
and the Lasker Foundation, they measured the increase in medical
spending from 1960 through 2000 and compared it with the number
of additional years of life lived, focusing on the gains in life
expectancy that were likely to be due to medical care. They assumed,
based on results from previous studies, that about half of the
improvement in longevity resulted from medical care.

Their analysis was published in the August 31, 2006 issue of the New
England Journal of Medicine. Between 1960 and 2000, they
found, the life expectancy for newborns increased by about seven
years. At the same time, estimated lifetime medical spending,
adjusted for inflation, increased by about $69,000. From birth,
they calculated, each year of life gained cost an average of
$19,900 over the entire period from 1960 through 2000.

A closer look showed that the average cost per year of life gained
increased within the years studied, from $7,400 per year of life
gained in the 1970s to $36,300 in the 1990s. It also increased
age. The average cost per year of life gained over the entire study
period was about $31,600 at 15 years of age, $53,700 at 45 and
$84,700 at 65. Taken together, the researchers painted a picture
of rapidly rising costs, particularly for older people. The costs
for each year of life gained for those over 65 had risen from $75,100
between 1960 and 1970 to $145,000 between 1990 and 2000.

This study and others of its kind can help health care systems
make judgments about how to use health care dollars more efficiently.
However, the indirect costs of medicine, such as improvements in
worker productivity, weren't taken into account in this study.
Neither were the improved functioning and quality of life for older
people that medical research has made possible. These are harder
to put a value one, but they certainly would make recent gains
look even better, especially for the older population.